Food marketplace once again being transformed

September 30, 2008
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by Morton Sosland

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As difficult as it may have been for food manufacturers to make the right pricing moves in reaction to the history-making run-up of ingredient prices in the past year, the situation now facing the industry in view of recent cost declines may be even more trying. Indeed, the generally well-ordered price upturns implemented in the past year turned out to be much less of a marketing and public relations nightmare than was feared, largely because of the vast media attention devoted to reporting record highs in energy and most food ingredients. It seemed almost as if everyone was expecting and ready to accept price increases. Now that grain and other markets, as well as crude oil, have registered downturns that have lessened the impact of the sharpest upturns, food manufacturing executives are sensing that the still tough retail marketplace may force decisions that will affect whatever margin improvement has been realized from cost declines.

Any hesitancy about cost increases implemented in the past year in the wake of the sharply higher costs was largely the product of the competitive retail marketplace. Grocers felt consumer spending being negatively affected by the downturn in the economy, the housing and credit crisis and rising unemployment. They resisted price increases as contrary to their hopes of preserving shopping patterns of better times. But this resistance, even among the giants of the industry, did not stand because of the realization of what was happening to ingredients and the knowledge that food manufacturing does not enjoy anything like the margins that would allow absorption of dramatic cost advances.

Amidst this combination of economic downturn and rising food prices the retail food industry responded by seeking to attract shoppers. Steps were taken that now are going to be felt as the current declining cost situation unfolds. Among initiatives with likely repercussions for food manufacturers is expanded promotion of private label as the area where it was easier to shave prices than with branded products. Of course, the same upward ingredient pressures that have forced brand manufacturers to raise their prices also affected private label. But the margin differences allowed grocers flexibility to the point where consumers, worried about their own personal incomes and employment, responded positively. There’s no question that private label products captured an expanded share of the food marketplace.

Another important retail development is the push to open "radically smaller" stores, most of which feature private label rather than branded products. Tesco, the U.K. retailer that has entered the United States with 78 stores in southern California, Arizona and Nevada under the Fresh & Easy Neighborhood Market name, may be credited as a pioneer in this push. Its own-brand products account for more than 70 per cent of sales, and Tesco recently announced that it will introduce over 200 "new" private label products by the end of this year. "Fresh & Easy customers like the own-brand ready-to-eat meal options which are like what they would make at home," said the chain’s c.e.o. Tim Mason. This in turn reflects recognition that food stores are gaining market share from food service in light of economic concerns.

Fresh & Easy claims "everyday low prices," which has been the central theme of the nation’s largest food retailer, Wal-Mart Stores, Inc. Wal-Mart built its strength on huge Supercenters, and it is now pressing this small store initiative with its Marketside stores. Safeway and Giant Eagle are also experimenting with the smaller store formats that focus on private label products. If these formats are deemed successful on account of their pricing and convenience, then the response by brands will have to involve reversing some of the actions taken in response to increasing ingredient costs. No, that doesn’t necessarily mean price reductions, but it does mean quality and convenience enhancements that will spur consumer demand in a food marketplace that once again shows signs of transformation.

This article can also be found in the digital edition of Food Business News, September 30, 2008, starting on Page 7. Click here to search that archive.

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